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The following two graphs drifted across my internet horizons yesterday.

The first show the spot price for electricity in Germany four years ago (2008):

Note the trough over night, matching limited demand, and how things ramp up to 9am, then stay at that level until starting to decline in early evening.

The second graph is the same spot price earlier this month:

Again the trough over night and the peak up to 9am. However, things then get very different! After 9am the price collapses back to the 4am level, and doesn’t start to rise again until 5pm.

What explains this difference? In the time between these two graphs ~20Gw of solar power have been installed. On a sunny day, or at least a day on which it is sunny where solar is installed, power is generated cheaply enough to make it impossible to charge more.

But there is one further salient feature in the comparison of the chart from 2012 with the one from 2008. Last week, the spot price did not dip below 35 euros per megawatt-hour, whereas prices started at 20 euros – nearly half as expensive – four years ago. Over a 24-hour period, the price of power on the spot market is indeed lower today than it was back then, but how do we explain the nearly doubling of power in the middle of the night? Given that baseload demand has hardly changed, it must be assumed that power companies are charging more in times of lower demand now that they cannot make their old profits during daylight hours.

Which makes it pretty clear that the market still isn’t really working. My question would be: how long until renewables (and presumably storage) make uneconomic to continue to burn things to generate power? If i was running a conventional power company, with a large investment in machinery required to put geology into the air, i’d be nervous…

[Most of the obvious rebuttals to statements about this not being feasible are answered here. Spot prices (current and historical for europe are available here.]

The big question is why this isn’t happening in other markets? All the talk of Japan suffering power shortage during the hot summer days seems to be babble that could be addressed, at least in part, by installing gigawatts of solar / wind. The sooner they get started the sooner they be shot of Tepco!

That’s the yield on the US Treasury 30 year Bond. You can see the yield being forced down 2%, to 2.5%, from November to the end of last year. Then it creeps back up to 3.5% over a period of several months, where it stabilises until mid-April. At which point it starts to slowly, relentlessly creep back up. All of which raises some interesting questions, like ‘what’s happening?!’, and ‘what does it all mean?!’.

That graph shows the interest rate (yield) that the government has to pay on it’s debt. The more worried that ‘the market’ is about the amount of money that the Treasury wants to sell, the higher this yield moves.

Which would be simple, but of course, things are never allowed to be simple. In order to have some control over the rate, the Federal Reserve (central bank) can print up some new money, and buy the debt from the Treasury.

Unfortunately this ruse doesn’t appear to be working, as you can see – the rate is moving up. How can this be? Surely the Federal Reserve is so powerful, in theory being able to print an unlimited amount of money, there should be no limit to the scope of it’s action.

The problem for the Fed is that the more money that they print, the more the damage the value of the currency. The more they damage the value of the currency, the higher they would be forced to push interest rates to protect it. Not doing so risks crashing the currency, which when we are talking about the dollar is a big deal. The world holds trillions of dollars in reserves, and would not take kindly to having it rapidly devalued.

Another option is to squeeze money out of the equity / stock markets. Money exiting the stock market, seeking safe haven in the bond markets would help stabilise the yield. Or at least that’s the theory… in my mind it doesn’t really work, or to the extent that it does, is of marginal effect. Someone holding stock decides to sell it, and move the funds into treasuries. For this to happen a second party must be on the other side of the transaction, and buy the stock. Where is the extra money coming from?

It’s possible to argue that the extra money is cash that is sitting on the sidelines (Sideline Cash Myth) but this doesn’t seem to stand up to much examination.

It seems to me that this puts us back in our usual position: between a rock and hard place. On one hand the government needs to finance debt in order to attempt to stimulate the economy / compensate for all the money being destroyed as debts go bad, interest rates need to stay low to keep this debt affordable, and reduce financing costs. And on the other, the currency needs to be protected or the market will not be willing to buy the the additional debt due to low yield, and fears of default.

Therefore the governments of the west are attempting to keep the system ticking along in the hope that enough growth will return to allow the debts to be paid down. At this point in the cycle, the debts are so huge that, i believe, this is no longer possible, or is at best, extremely unlikely.

Keep an eye on that graph. Nothing radical is going to happen now, but i suggest this is how you’ll know who (the central banks or the markets) is “winning” the war.

As an aside, a lot of this talk is about the dollar, but that’s mostly because it the easiest set of data to work with. The same situation is playing out in the other western economies, and the various central banks are fighting the same battle. The interesting exception to this rule, as always it seems, is the Bank of Japan, which despite printing money like it’s going out of fashion, has kept the yield on the japanese long bond remarkably stable. Again, as usual, i don’t understand the mechanism by which this can be explained…

Over on dshort.com there are updates of the Four Bad Bears, and Mega-bear Quartet. The first of those links to some pretty interesting looking datasets / discussions. In essence this is now the 2nd worst S&P / DOW market in a hundred years… I’m guessing the Great Depression record is going to be hard to beat. Despite all my cynicism, it does appear that some lessons have been learned in the preceding years.

Anyway, it will be interesting to see how the S&P tracks the 30s collapse. My feeling is that we’ll see a similar pattern of long decline, punctuated by ‘Sucker Rallies’. The peaks and troughs in those graphs are really maps of human nature, and despite what history tells them, people just want to believe!

Hope. Hope has bought us this far – far enough to shred our hearts to pieces.